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12 December 2016

Break Clauses and ‘Vacant Possession’

An important reminder of the need for strict compliance with break provisions is provided in the recent case of Riverside Park Ltd v NHS Property Services Ltd [2016].

Facts

This case involved a ten-year lease with a one-off break right entitling the Tenant to terminate the lease after five years if vacant possession was delivered on the break date. The Tenant served a valid notice, but the Tenant did not remove internal demountable partitioning it had erected at the Property, and therefore the question arose as to whether vacant possession had in fact been provided on the break date. The Tenant argued that the partitioning and various other items amounted to fixtures, whereas the Landlord argued that these items were mere ‘chattels’, which the Tenant was obliged to remove in order to provide vacant possession.

Decision

The High Court ruled in the Landlord’s favour, that the partitioning amounted to ‘chattels’. The High Court relied on expert evidence showing that the partitioning was not attached to the structure and could be removed without causing injury to the fabric of the building. The Tenant’s failure to remove the partitioning therefore meant that vacant possession had not been delivered. As such the Tenant had not validly exercised the break, meaning that the Tenant remained bound by the ongoing obligations and liabilities in the lease for the remaining five years of the ten-year term. This was a painful case for the Tenant given that it would have only cost a few thousand pounds to remove the partitions.

Other Cases

There has been much judicial discussion as to how the term ‘vacant possession’ should be interpreted. In NYK Logistics (UK) Ltd v Ibrend Estates BV (2011), Rimmer LJ made it clear that vacant possession requires the property to be empty of people and any chattels which could ‘substantially’ prevent or interfere with the enjoyment of the premises. The second element of this test is not however easy to determine.

In Cumberland Consolidated Holdings Ltd v Ireland (1946), Lord Greene suggested that substantial impediment to the use of the property, or a substantial part of it, will only occur in exceptional circumstances.

In Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd (2006), Lewison LJ explained that the second element of the test considers the physical condition of the property from the point of view of the Landlord. If there is a substantial impediment of the Landlord’s use of the property or a substantial part of it, then vacant possession has not been given.

In Riverside Park Ltd v NHS Property Services Ltd there was evidence that no other Tenant would wish to retain the partitioning installed by the Tenant, as the layout was outdated, with the current demand in the marketplace being for open-plan space, the Landlord was prevented from taking back possession of a substantial part of the Premises, and therefore vacant possession had not been given.

Practice Point

The consequences of failing to comply with break provisions relating to ‘vacant possession’ are significant. Therefore, these provisions require careful consideration by both Tenants and their legal advisors, not only at the stage that the break provisions are being exercised, but also when drafting and agreeing the terms of commercial leases in the first instance. Interestingly, the Lease Code 2007 does not recommend vacant possession as a pre-condition of a break right. Instead it recommends a more watered-down version which just requires the Tenant to hand the premises back ‘free from all rights of occupation’.

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